Corporate Democracy Corporate democracy gives owners of the corporation a say in how to

Corporate Democracy Corporate democracy gives owners of the corporation a say in how to

manage it. By law, shareholders are not allowed to interfere with the ordinary business—the day-to-day operations—of a corporation. But they elect representatives, the members of the board of directors, to oversee the management of the firm. The board of directors may be comprised of officers of the corporation or may include persons not employed by the corporation—referred to as outside directors.

It is not always clear just what constitutes the ordinary business of a corporation: Golden parachutes (attractive severance packages) for top management? Salary and stock options for management? Doing busi- ness with tobacco companies? Buying goods from companies employing underage workers?

6 Prior to this rights offering, Time Warner did attempt another offering whose terms were not in the best interests of the shareholders. Dennis E. Logue and James K.

Seward discuss the Time Warner rights offerings in detail in their article entitled “Time Warner Rights Offering: Strategy, Articulation and Destruction of Sharehold- er Value,” Financial Analysts Journal (March/April 1992) pp. 37–45.

FINANCING DECISIONS

EXHIBIT 16.1 The Value of a Time Warner Common Share and the Right to Buy a

Time Warner Common Share at $80 per Share

Source: Standard and Poor’s Daily Stock Price Record Any shareholder owning either $1,000 worth of the common stock

or 1% of the outstanding shares is permitted to introduce a proposal to

be voted on by shareholders. 7 To avoid having proposals that are inap- propriate—in the sense that they are really about ordinary business or simply a nuisance—the management may petition to the Securities and Exchange Commission (SEC) to remove a proposal from the proxy. In the past, the SEC has allowed corporate management to remove shareholder proposals that dealt with management compensation issues, but more recently has forced companies to include these proposals in the proxies.

A problem that became quite noticeable during the 1980s merger mania is that most large, institutional investors tended to vote as recom- mended by management and individual investors were, in large part, apa- thetic towards corporate issues. As both institutional investors and individual investors are forming coalitions to encourage shareholder partic- ipation in corporation issues, this situation is becoming less of a problem.

Another problem is that for most corporations, voting is not always confidential. It may be the case that management receives your votes and, if not pleased with how you voted, may contact you trying to per- suade you to change your vote. In many cases, shareholders and manag- ers of institutional investors have been pressured to vote in favor of the present management.

7 This requirement is set forth in the Securities Exchange Act of 1934, Rule 14a-8.

Common Stock

Still another problem is that if a shareholder proposal succeeds, the proposal is nonbinding. Management can simply ignore it. Complicating shareholders’ rights are provisions referred to as poi- son pills. Poison pill describes a provision that makes the target of a takeover offer unattractive. These provisions typically involve granting shareholders of the target firm special rights or privileges if the firm is the object of a takeover bid. Usually, the management of the target firm can negate the poison pill if they feel that the offer is in the sharehold- ers’ best interest.

An argument for these “pills” is that they allow the management of the target firm to negotiate the best price for the shareholders since the only way to avoid the costly poison is through management’s approval. An argument against these pills is that they discourage takeover bids that would have paid shareholders more than the current stock price for their shares.

Researchers have found that poison pills have a depressing effect on share price: Investors do not like these provisions. 8 Oddly, poison pills are often referred to as shareholder rights plans. Shareholder proposals represent a weak method of effecting change in a corporation. This is due to the apathetic nature of shareholders, the possibility of arm-twisting by management, and because these proposals are nonbinding. An alternative method of getting a corporation to change is to wage a proxy fight, gaining a voice in the corporation by getting seats on the board of directors. Usually, the board members elected each year are nominated by the current board members and run unopposed. In a proxy fight, an alternative slate of board members is nominated by someone interested in gaining representation on the board. And the battle begins.

A proxy fight pits current board members against the alternative slate, each slate vying for the votes, that is, the proxies, of the sharehold- ers. An example of a proxy fight is the one waged (and lost) by investors Carl Icahn and Bennet LeBow for control of RJR Nabisco Holdings in the spring of 1996. Icahn and LeBow initiated the proxy fight to force RJR Nabisco to spin-off Nabsico from the tobacco company. RJR Nabisco fought back and won, defeating the Icahn and LeBow slate by a 3-to-1 margin—and costing the RJR Nabisco $11 million (or 2 cents per share).

8 A detailed analysis of the different types of poison pills and how they affect share price can be found in Paul H. Malatesta and Ralph A. Walkling, “Poison Pill Secu-

rities: Stockholder Wealth, Profitability, and Ownership Structure,” Journal of Fi- nancial Economics (January/March 1988), pp. 347–376; and Michael Ryngaert, “The Effect of Poison Pill Securities on Shareholder Wealth,” Journal of Financial Economics (January/March 1988), pp. 377–418.

FINANCING DECISIONS